LUKOIL, the leaders in the Russian and international oil industry, have been working in Kazakhstan since September 1994, and are involved in a number of long-term hydrocarbon projects. The company is devoting an increasingly great deal of investment to these ventures, which now amounts to $1.5 billion.

Kazakhstan’s economic upsurge is based on the efficient use of its human resources and natural wealth, principally oil and gas. Since independence, the national oil and gas companies have emerged and matured in the country, taking advantage of the joint experience of the oil industry of the former Soviet Union and that of recognised world leaders.

Similarly, a group of giants capable of handling large-scale projects and long-term overseas investment has arisen in Russia over the past decade. The number one player in Russia’s oil and gas sector is LUKOIL, a company which has been a party to the most important projects in Kazakhstan in recent years, prompted to do so by its long-term development strategy and trends on the international energy market.

No other Russian company has so many projects or places so much investment in the CIS, and it is symbolic that LUKOIL has pioneered the restoration of ties between CIS countries in the oil and gas sector. The company’s management, which has integrated the best traditions of the Soviet and Russian oil and gas industry, clearly understands the importance of and prospects for co-operation between the oil and gas professionals of the former Soviet republics.

At present, LUKOIL is heavily involved in Kazakhstan, including geological prospecting, field development, production of oil and gas, and sales of oil products, equipment and materials. In addition, LUKOIL is expanding its network of petrol stations and has initiated joint ventures for building industrial and social facilities.

The impetus for these joint projects was provided by the February 1997 Intergovernmental Agreement on Technical and Economic Co-operation and Integration of the Oil and Gas Sectors of Kazakhstan and Russia.

The recently created LUKOIL Overseas, an international holding company directed by LUKOIL’s top manager, Andrey Kuzyayev, represents another step towards enhancing the company’s performance abroad, particularly in Kazakhstan.

Albert Isangulov, Project Manager for Kazakhstan, said that the country is a strategic region for LUKOIL, one where the company can realise its competitive advantages most efficiently. Therefore, projects in Kazakhstan accounted for 78% of LUKOIL Overseas’ 2001 investment programme.

To Kazakhstan, LUKOIL is something more than just another Russian company, albeit of international renown. LUKOIL’s business strategy in Kazakhstan represents the essence of its vast experience gained in Europe, the Americas, the Middle East, Transcaucasia and Central Asia. The company’s management have pointed out on many occasions that LUKOIL’s operation in the country is marked by strict adherence to international standards of corporate management, partnership and human resource policy.

According to Albert Isangulov, the company’s approach towards Kazakhstan is systematic. Every oil and gas project featuring LUKOIL’s interests is ultimately linked to the Caspian Pipeline Consortium (CPC), in which the company has a 12.5% stake and financing obligations of up to 25% through the joint venture LUKARCO.

The first Kazakh venture to involve LUKOIL was Turgay Petroleum, a joint stock company that has been an operator of the large Kumkol oilfield since 1995.

LUKOIL’s investments in this project since its inception have totalled over $140 million, including over $32 million in 2001. Last year, expenditure by the venture exceeded $50 million.

The increasing pace of production drilling resulted in the commissioning of 24 new wells last year, bringing the stock of operating wells up to 140 wells. As a result, the company’s daily output has been boosted from 19,000 to 34,000 barrels. The management of the venture is planning to invest more than $40 million in drilling and field development alone.

Importantly, local personnel were maintained in the field and are now involved at all stages of the oil business, from drilling and field development to marketing and management. The oil produced by Turgay Petroleum is the cheapest in the country, its production cost being as low as $19 per tonne or $2.5 per barrel.

Oil from Kumkol is supplied to Shymkentnefteorgsintez for refining. In this way, Turgay Petroleum’s operation maintains a stable workload for this refinery and a supply of oil products to South Kazakhstan.

The issues of gas utilisation and the prospect for building a pipeline to the CPC are being tackled together with Hurricane Kumkol Munai. Transporting products from Kumkol will ensure a workload for the growing capacity of the export pipeline in the near future. Meantime, the CPC’s main focus is Tengiz, Kazakhstan’s largest and most celebrated oil and gas venture, in which LUKOIL also has interests.

Last year, Tengiz produced 12.5 million tonnes of oil and 4.9 billion cubic metres of associated gas, with LUKOIL’s share coming to 337,000 tonnes of oil and 132 million cubic metres of gas. On the whole, since the company became involved in Tengiz its production has totalled 45.7 million tonnes of oil and 14.9 billion cubic metres of associated gas, including LUKOIL’s share of 1,233,700 tonnes of oil and 402.2 million cubic metres of gas. LUKOIL’s total investment is almost $180 million.

The project is being implemented using strict workplace safety standards. The Kazakhstani workforce accounts for 74% of its personnel, and Kazakhstani goods and services account for 18% of the total project cost, which illustrates the new standards being imposed on joint ventures.

Last year was a special one for LUKOIL and other stakeholders in Tengizchevroil. Investment by the joint venture in 2001 totalled $580 million, production started in the neighbouring Korolevskoye field, preparation was completed for boosting production to 22 million tonnes in 2005, and, finally, the CPC commenced operation.

Another Kazakh project involving LUKOIL is Karachaganak. The consortium of investors is planning to boost the field’s annual production of gas condensate to 10.4 million tonnes, and sales of natural gas to 7 billion cubic metres by 2003.

By the beginning of 2002, investments by all shareholders had totalled $2,898 million (LUKOIL’s contribution was $435 million), including $1,110 million invested in 2001 ($166.5 million, respectively). In addition, there are plans to invest $2.5 million in the field’s infrastructure over the next two years, including construction of a 635-km pipeline to link Karachaganak to the CPC system at a cost of $400 million. As is expected, in 2004 throughput for this facility will reach 7 million tonnes of gas condensate, with an ultimate export goal of 12 million tonnes per year.

Currently, a processing complex is under construction in Karachaganak at a cost of $900 million, including the UKPG-2 and UKPG-3 facilities. A water supply project for the city of Aksai is in full swing, and a number of other social programmes are receiving investment (such as the construction of a cultural centre, an ice rink, etc.).

With the launch of the CPC, the efficiency and the scale of exports of Karachaganak output will increase dramatically, as well as tax revenues for Kazakhstan.

Thus, LUKOIL has laid a solid foundation for future co-operation with Kazakh partners under international consortia. The intensive development strategy of LUKOIL Overseas envisages enhancing its investment activities in Kazakhstan. The company views the common land and the maritime border of Kazakhstan and Russia which run through rich oil and gas regions, as well as the presence of oil and gas transportation systems with access to petrochemical facilities and sea ports, as an excellent background for long-term partnership.

At the Kazakhstan International Oil and Gas Exhibition (KIOG?-2001) Albert Isangulov said that LUKOIL is looking forward to further co-operation, participating in tenders, and developing new fields and other activities. It is likely that the next few years will see much greater achievements from this leader in the international energy sector.

LUKOIL Overseas

In order to assist LUKOIL’s overseas expansion and improve the management and control of international up-stream projects, a 100% affiliate entitled LUKOIL Overseas Holding Ltd. (LUKOIL Overseas) was founded and vested with the ownership and operational management of oil and gas assets in five countries. The company controls 467 million tonnes of hydrocarbon reserves, and produces up to 10.23 million tonnes annually.

At present, LUKOIL Overseas is operating the following international projects:

LUKOIL Overseas incorporates LUKOIL Perm, another Russian affiliate that operates oil and gas projects in the Perm and Volgograd regions, Khantia-Mansia and Komi.

Since the project started up, LUKOIL’s investments have amounted to $352 million, including $82 million allocated in 2001.

The export pipeline built by the CPC will allow about 28 million tonnes of oil to be delivered each year from the Tengiz field to the deep-sea terminals of the port of Novorossiysk on the Black Sea.

In 2013, after completion of four additional stages, the annual throughput of the pipeline will reach 67 million tonnes of oil.

Kumkol

The Kumkol field was discovered in 1984 in the southern part of the Turgay Plain, 200 kilometres south of Kyzylorda. Commercial production in the field commenced in 1990. Since 1995, the north-west part of the field has been under development by Turgay Petroleum, a fifty-fifty venture between LUKOIL and Hurricane Kumkol Munai.

Recoverable reserves in the contract area amount to 42 million tonnes of oil, and it is planned to extract over 30 million tonnes over 25 years. The aggregate output of six years of operation has exceeded 6 million tonnes of oil and 70 million cubic metres of associated gas. In 2001, the company’s production reached its peak at 1.5 million tonnes of oil and 15.12 million cubic metres of gas.

Tengiz

Discovered in 1979, the Tengiz oilfield is located on the east coast of the Caspian Sea, 120 kilometres south of Atyrau. The site is unique in such parameters as collector characteristics, the abnormally high strata pressure, and the content of oil, gas, and corrosive substances. Geological oil reserves are estimated at 2.7 billion tonnes. The field came under development in 1991, and is now operated by flowing/dissolved gas drive. LUKOIL is involved in Tengiz through its affiliate LUKARCO, which holds 5% in the venture.

Since 1993, the field has been operated by Tengizchevroil, a joint venture which presently comprises Chevron Overseas (50%), ExxonMobil (25%), Kazakhoil (20%) and LUKARCO (5%). LUKOIL joined the project in 1997.

Karachaganak

This field is being developed by Karachaganak Integrated Organisation (KIO), which was founded in 1997. The stakeholders are British Gas (32.5%), Agip (32.5%), Texaco (20%) and LUKOIL (15%).

Karachaganak is located in the north-western part of Kazakhstan. It is a giant field listed among the world’s top 25, having geological reserves of 1,371 billion cubic metres of gas, 764 million tonnes of gas condensate and 472 million tonnes of oil. Recoverable reserves amount to 300 million tonnes of oil and gas condensate and 500 billion cubic metres of gas.

Since the PSA came into effect, production in the field has totalled 13.5 million tonnes of oil and gas condensate (including LUKOIL’s share of about 1.8 million tonnes) and 14 billion cubic metres of gas (about 2 billion cubic metres, respectively). In 2001, production by KIO reached 4.8 million tonnes of gas condensate (including 3.5 million produced in 2000) and 4.8 billion cubic metres of gas (3.9 billion cubic metres, respectively). The greater part of the field’s output is shipped to Orenburg, Russia, where it is processed.